In the run-up to Budget 2008, Business Line has been interacting with many accounting and tax professionals to know their views on what proposals are needed. Here are a few snatches.

Individual taxation

It is that time of the year when everyone waits with bated breath to check out the benefits that may be dished out by the Finance Minister in his Budget, says S. Rajesh, Tax Director, Global Tax Advisory Services, Ernst & Young (E&Y). Not many tax benefits have been given to the individual taxpayers in the past few years despite the buoyancy in the economy and increase in direct tax collections, he adds.

To add to that, individuals have been subject to additional compliance requirements each year.

The annual Budget presents an opportunity to the Government to show its understanding of the taxpayers expectations and the measures taken to fulfil these aspirations without interfering with the macroeconomic aspects of the country, feels Rajesh.

There is an urgent need, he says, to simplify our tax laws and clarify the tax positions applicable to individuals who are taxable in India on their global income.

For example, the Indian tax laws exempt the capital gains derived from sale of long-term capital asset when an individual invests the gains in specified assets, including a house property.

Currently, the tax laws do not clearly state whether investments made in a house property outside India will be eligible for this exemption, says Rajesh. Given the surge in the number of Indians returning from abroad and foreign nationals working in India, it is imperative for the Government to identify the ambiguities in laws and address them as soon as possible.

Service tax

Pratik Jain and Siddharth Mehta of KPMG are concerned that ever since the introduction of service tax in 1994, the Government has been expanding its coverage each year through the Union Budget. As a result of gradual expansion of the tax net, in many cases, the law appears to be ambiguous and inconsistent, they fret.

Applicability of service tax on services provided to various government agencies is one such area, says the duo.

Take for instance, services of issuing voter ID cards, driving licences, etc, where the Government engages third party service providers. The obvious question is whether such services are liable to service tax. They ask: Does the Government want to collect service tax on these services? It does not appear so, if one looks at the exemptions granted and clarifications issued by the Government in the past.

There appears to be an intention to exempt services provided to government agencies in discharge of their statutory functions, reason Jain and Mehta.

It seems that the Government only wanted to impose tax in situations where the Government is engaged in business or commercial activity. However, this intention is not clearly articulated in the definitions and clarifications issued with respect to certain taxable categories.

M&A

Income-tax, along with stamp duty, is the most important cost of executing an M&A (merger and acquisition) deal, observe Hiten Kotak and Mehul Bheda, executive director and senior manager, respectively, in PricewaterhouseCoopers (PwC).

While significant opportunities exist for structuring a deal efficiently from an income-tax perspective, especially in the case of cross-border transactions, what are needed, they say, are certain amendments in the current tax laws. Even the Indian corporate law for mergers, to an extent, needs to be brought in line with international practices, say Kotak and Bheda.

For example, in countries such as the US, share swaps, subject to certain conditions, are exempt from tax. Of course, the cost of the acquired shares remains the same as the swapped shares, i.e., no step up in cost basis is available.

India considers share swaps as taxable events, resulting in capital gains even where cash consideration does not pass, they differentiate. The only exception to this rule is where share swap happens as a result of a court approved merger.

Adopting the international model will provide greater flexibility in structuring M&A deals, note Kotak and Bheda. In order to provide flexibility and prevent misuse, it can be provided that only those deals where share swaps form more than 50 per cent of the consideration, should be exempt for the share swap portion. The cash portion should be taxed as per the normal provisions.

While a start has been made with the limited opening up to single-brand retailers, further liberalisation, both in terms of additional retail segments as well as higher FDI caps, would give a fillip to the industry, he adds.

In a scenario where large Indian business houses like Tatas, Reliance, Birlas and Bharthis have already entered the field with huge investment plans, the argument that smaller family-owned stores will be negatively impacted by liberalisation of the FDI policy appears to be stand on weaker grounds, reasons Chandy.

On the other hand, the opening of the sector will make available significant capital and technology and will lead to application of latest global best practices, which will enrich the growth of the sector.

Financial services

There seems to be a bit of confused approach towards liberalisation and regulation of the financial services sector, feels Punit Shah, Leader, Financial Services tax, PwC.

SEBI and RBI have evolved as independent regulators and have played an active role in evolving the regulatory regime for financial service players. However, sometimes the approaches are contradictory and not in the same direction, he says.

The draft guidelines on REITs, overseas investment by domestic financial services players, etc., are some recent initiatives that have been long awaited.

Considering the fact that FIIs play the most crucial role in the Indian stock markets, is there a need to bring about more clarity in the taxation of the gains earned by them? To this, Shah answers that even post Circulars and numerous rulings, characterisation of gains of FIIs as business income or capital gains remains an evergreen issue. The Circular still leaves a lot of room for subjectivity and unwarranted litigation. It is time this matter was laid to rest.

What key tax measures concerning the financial services players would he like to see in the Budget to provide impetus to the Indian stock market? The list is long, frets Shah.

In the current scenario, if the Finance Minister grants an exemption from service tax itself for the oil and gas sector it would be a well-appreciated move, thinks Uma Iyer, an E&Y manager. Alternatively, even if such exemption is not given, keeping in mind that the overall intention of the indirect tax regime is to allow flow of taxes down the value chain, E&P (exploration and production) companies may be allowed credits of service tax charged by the service provider against their output crude oil cess liability, she argues. This will help in reducing the cascading effect of taxes and would be a step towards a comprehensive GST (goods and services tax) regime.

Budget 2007 introduced service tax on mining services from June 1, 2007, traces Iyer. Prior to introduction of mining services, service categories such as survey and exploration service, technical testing and analysis service, maintenance or repair service and consulting engineer services sought to levy service tax on individual activities of the oil and gas sector.

The definition of mining service has however been kept very wide and seeks to cover any service in relation to mining of mineral, oil or gas, she says. The departmental clarifications also state that all activities in relation to exploration and exploitation of oil and gas will be liable to service tax.

Expenditure in relation to income

Richa Sawhney, principal consultant in PwC, hopes that Section 14A of the Income-Tax Act, 1961, is ripe for a re-look. This section stipulates that for computing income of an assessee, no deduction shall be allowed in respect of expenditure incurred by him in relation to income which does not form part of his total income under the Act.

Sub-section (2) of Section 14A, inserted in the statute book with effect from April 1, 2007, further stipulates that the assessing officer (AO) shall determine the amount of expenditure incurred by the assessee in relation to such income in accordance with the prescribed method, if having regard to the assessees accounts, he is not satisfied with the correctness of his claim. This would also hold good in cases where the assessee claims that no expenditure has been incurred in relation to such income, elaborates Sawhney.

A cursory look at this small and seemingly simple section would hardly reveal the extent of controversies this section has created and needless to add that each judgment on this issue seems to fuel the existing confusion, she cautions.

One such issue revolves around the applicability of this section if the business carried on by the assessee constitutes one indivisible business. In such cases, question arises as to whether the entire expenditure would be a permissible deduction and apportionment of the expenditure under Section 14A is at all called for.

Pharma and health sciences

Ravi Vishwanath, Associate Director in E&Y, is not happy that long-standing demands for providing bold fiscal incentives, which were expected to lend impetus to growth in the pharmaceutical and biotechnology industry, have been largely overlooked in the previous Budgets. This has left the industry seeking a booster shot from North Block in the coming Budget 2008 to sustain and aggressively leverage the opportunities in todays competitive Indian and global environment.

While Budget 2007 did offer certain sops to these sectors, the industrys response was rather lukewarm, he says. According to industry leaders, the need of the hour is more fundamental and forward-looking fiscal policy measures, which will propel the sectors on a growth trajectory. The health sciences sector offers as much promise, if not more than the IT (information technology) sector, as industry bodies put forth.

IT hardware

Much has been written about the services side of IT. The other side, hardware, has miles to go, says Bharat Varadachari, a partner in E&Y. Indias share of global production stands at approximately 1 per cent (China is at more than 14 per cent), he points out. 85 per cent of the PCs (personal computers) consumed in India are assembled and with limited value addition, adds Varadachari. More than 90 per cent of assembled components are imported. In fact, 30 per cent of Indias trade deficit is on account of electronic hardware imports.

The going is unlikely to be easy, he observes. But if the Government plays a more decisive role than it has done so far, the hardware industry may well witness a switch in the above statistics in times to come, Varadachari hopes. Government intervention, according to him, can assume several forms, be it designing more growth oriented tax policies, eliminating procedural bottlenecks, promoting state-of-the-art infrastructure or actively promoting Indian R&D (research and development) and entrepreneurship in collaboration with the private sector and the countrys academia.

Customs duty

There is widespread expectation, among industry associations, that the peak Customs duty rate will be reduced in the next couple of years so as to fully align it with the prevailing Asean (Association of South East Asian Nations) levels. Some trade associations, for instance, have represented that in the Budget 2008-09, the peak rate of basic Customs duty should be reduced to 7.5 per cent keeping with the trend over the past few years. However, on the other side, few associations have argued that further reductions at this stage could be disadvantageous to the domestic industry, state S. Harishanker and Varanasi Suresh of KPMG.

They cautioned that the peak rate should be brought down with suitable exceptions, like the agricultural sector which is highly subsidised in many countries such as the US and EU.

The Government must tread carefully while attempting to balance the divergent interests of opening up markets and protecting domestic industry, advise the two. While the Government has rectified the inverted duty structures in the past, it should continue to eliminate such anomalies going forward and also the process of further rationalisation of duty structures should be undertaken in a systematic manner.

Indirect taxes

In the backdrop of tax buoyancy and with the general elections around the corner, there is every possibility that Budget 2008 will be a soft one on taxes, more so on indirect taxes, foresees B. Sriram, Associate Director in E&Y. There are a few macro points which are being pursued on the indirect tax front, such as, Customs duty alignment with Asean rates and the move towards adoption of GST by 2010. However, with a tumbling dollar, imports are becoming cheaper, further lowering of Customs duty would only reduce Customs revenue. Hence, he reasons, that a reduction in Customs duty rates does appear unlikely at this point of time.